Australian economy continues to be on strong footing

This week’s data for the Australian economy further gave evidence that the economy continues to be strong. Business conditions continued to be high, while employment in the country rose.

This is expected to have added to the dilemma that the RBA is facing about the monetary policy. Australia published its labor force report yesterday that indicated additional growth in employment, which rose 18,000 in the month. This was sufficient to maintain the jobless rate 5.7 percent, the lowest level in more than two years.

Other indicators too have implied that employment growth is likely to remain strong. The NAB business survey continues to provide an optimistic picture of the labor demand, with profitability continuing to be at high levels. Moreover, the Westpac-ACCI composite labour market index continues to be strong in spite of a slight decline in the second quarter, in line with strong jobs growth.

Business surveys’ other details also came out to be positive. Capacity utilization is at the highest level, mainly due to solid trading conditions in major states of Victoria and South Wales. The economy is benefitting from the lower AUD. It is boosting tourism in Tasmania and underpinning export and import competing manufacturers, said ANZ in a research report.

In the mean time, the recent construction survey by Ai Group/ACA underpins the view that investment in infrastructure would underpin growth in years to come. According to the report, a considerable work pipeline, focused on road and rail transport, is expected to stimulate construction activity and counter certain ongoing drop in the mining industry, noted ANZ.

Overall, the official surveys and data continue to imply that growth in Australian economy is widening beyond the resources sector, according to ANZ. The Reserve Bank of Australia shares this view as Assistant Governor Chris Kent stated recently that “economic activity is rebalancing toward non-mining sectors” and “non-mining activity is growing a little faster than GDP”.

The upbeat story regarding the rebalancing of the domestic economy is in contrast with subdued inflation and makes matters complex for the central bank. Even if it is expected that the continuous weak inflation would compel the central bank to lower again in August, there is a risk that the Reserve Bank tolerates inflation if it continues to be lower than the target range of 2 percent-3 percent in case of strong flow of data, added ANZ.